Question on CCP 508b for Prof. S

[cdmosaic]

Prof. Shays, I know you’ve mentioned this many times, but in reading this breakdown of CCP 580b and 580d I have a question in the 5th paragraph below where it states “(first forecloses, thus selling out the junior lien, who then still has recourse against the debtor).” This seems to indicate that if the 1^st forecloses and wipes out the 2^nd, the 2^nd can come after you for the deficiency even if it was a non-recourse purchase money loan. Am I reading this right or is that only the case if the 2^nd was not a purchase money loan to begin with? The wording is confusing. Thanks!

CCP 580b: This is the purchase money rule. Under this rule, a lender can not pursue a debtor after foreclosure for any deficiency balance as long as the qualifications under 580b are met. That means that if there was a judicial or non-judicial sale, and the lender did not receive their full loan balance from the sale and money is still owed, they can not enforce payment on the difference. Specifically, the statute holds as follows:

To qualify under this statute, you must meet the following three requirements:

1) Purchase Money: The loan must finance the purchase of the property. A refinance will not work
2) Occupancy: The purchaser must occupy the property entirely or in part. Investment property where the purchaser never occupied the property at least in part, will not work
3) Under 4 Dwelling: The property must be residential property with 4 or less families.

How does this play out? If you purchased a home for $500,000 with a $400,000 first deed of trust and $100,000 second deed of trust, which was never refinanced, where there was no fraud or waste, and which you occupied, if the first forecloses and receives $300,000, then the first and second can not pursue you for any deficiency. So even though the first and second are still owed $100,000 each, they are prohibited to pursue the deficiency by law.

Nevertheless, had a refinance been involved or had the second been taken out after the purchase, such as the case in most HELOC loans, then the 580b exception does not apply and both would be able to sue on its $100,000 deficiency, but only in the context of a judicial sale per below, or if the lender was a “sold out junior” (first forecloses, thus selling out the junior lien, who then still has recourse against the debtor). There may also be tax implications as well.

CCP 580d: This is the Trustee Sale Non-Deficiency Rule: Under this rule, once a lender irrevocably elects to proceed with a non-judicial sale, it is prohibited from proceeding any further on any deficiency. That means that if even if there is non-judicial sale, and the lender did not receive their full loan balance from the sale where you still owe money, it still can not enforce payment on the difference.

Unlike 580b above, the loan does not need to be purchase money, there is no occupancy requirement, and there is no dwelling requirement. Thus this rule applies to investment property, commercial properties, and other real estate purchases. Quite simply, if a lender proceeds with a non judicial sale, there is no further recourse against the borrower. This is simply because the lender, at its election, converted the loan from a recourse to non-recourse loan. The election for this remedy is considered final and irrevocable upon the sale.

[ProfessorShays]

The "non-recourse" nature of the 2nd that was a "purchase money" secured loan at the time of its origination (when the home was purchased) is not changed because it becomes "unsecured" as the result of the foreclosure of the 1st loan. It remains "non-recourse." Of course a loan made at a time after the home purchase, or a subsequent refinance of a purchase money loan, effectively eliminates its "non-recourse" nature (although I expect a courageous judge to upset the apple cart on that conclusion given the right facts where a refinance is simply a loan revision where the interest rate is the only real change).

Daniel

[dealingwithHomeEq]

I agree with the Professor:

In Brown v. Jensen, the California Supreme Court extended the purchase money antideficiency protection by holding that purchase money junior lienholders could not bring actions on their notes after the security had become valueless because of a sale by the holder of the purchase money first deed of trust.

30 Los Angeles Lawyer 34, *


Copyright (c) 2008 Los Angeles County Bar Association
Los Angeles Lawyer

February, 2008

30 Los Angeles Lawyer 34

FEATURE: LOCKED OUT: IN FIGHTING A POTENTIAL FORECLOSURE, THE TIME TO ACT IS BEFORE THE SALE TAKES PLACE

by Linda Northrup and Karen Luong

Linda Northrup is the founding partner at Northrup Schlueter, where her practice focuses on real estate and business litigation. Karen Luong is an associate at Northrup Schlueter.

. . .

Deficiency Issues

A client facing foreclosure may not only lose property but also face a deficiency judgment. Counsel must ascertain whether antideficiency statutes will protect the client from having to pay this difference between the amount bid at the foreclosure sale (or the fair value of the property if the bid is lower than fair value) and the amount of the debt. Anti-deficiency statutes are a series of laws, two of which are of primary importance to clients facing foreclosure. One protects 1) those who borrow directly from the seller of a property and give the seller a lien and 2) those who borrow the purchase price on an owner-occupied single family property (a property improved with one to four residential units) and who have offered the property as security for the purchase money loan. 53 This law provides that the seller as lender or the third-party purchase money lender may not pursue the borrower individually for any deficiency under any circumstance (including after a judicial sale). The former residential property owner may have lost the property but can at least walk away from the foreclosure sale without further monetary liability in most cases. 54 The second important antideficiency law protects all borrowers from a deficiency following a nonjudicial foreclosure sale when a deficiency judgment would have been possible if the foreclosure had been done judicially. 55

In Brown v. Jensen, the California Supreme Court extended the purchase money antideficiency protection by holding that purchase money junior lienholders could not bring actions on their notes after the security had become valueless because of a sale by the holder of the purchase money first deed of trust. Normally, a junior lienholder whose security is lost in the foreclosure sale by a senior lienholder (that is, a sold-out junior lienholder) still has the right to sue on the note to recover its debt. However, the Brown court stated:

The broad protection provision (Code Civ. Proc., § 580b) for purchase money trust deeds stands on a reasonable footing. A purchase money trust deed is not like an ordinary trust deed and note....With purchase money trust deeds...the character of the transaction must necessarily be determined at the time the trust deed is executed. Its nature is then fixed for all time and as so fixed no deficiency judgment may be obtained regardless of whether the security later becomes valueless. 56

The above scenario applies only when the junior lien was part of the original purchase transaction. Antideficiency protection applies to liens undertaken as part of the purchase transaction, even when more than one lien exists, as long as those liens were part of the purchase money mortgage. 57 However, if the sold-out junior lienholder's trust deed is not a purchase money mortgage, the lienholder may be able to recover the deficiency against the borrower directly. 58 Therefore, whether the purchase money antideficiency statute applies to bar lienholders from collecting against the borrower depends on the individual facts of each case.

As the housing and credit slump continues, an increasing number of borrowers face foreclosure of their properties. Helping a client navigate through the maze of foreclosure deadlines and rules is a daunting task. Once a foreclosure sale has been completed, it becomes even more difficult to gain any sort of victory for the client. Because attacking a completed foreclosure sale is only available on extremely limited grounds, counsel should work hard at the beginning of the foreclosure process to avoid the undesirable (and many times unavailable) last resort of attacking a completed sale. The borrower's likely financial difficulties--or presumably the borrower would not be in foreclosure--will be a complicating [*39] factor, because challenging foreclosure costs money. There is no easy way out of the foreclosure process, but a thorough knowledge of the available avenues can help counsel navigate the maze, possibly obtaining a favorable result.

[cdmosaic]

Thank you, that helps clarify the situation. My 2nd is part of the original 80/20 loan. My 1st is a refi (no cash out - term change only), but the original 2nd agreed to subordinate to the new 1st, so seems to be purchase money from what I know.

[BDLidd]

Professor, I think we need to clarify that CCP 580(b) does offer anti-deficiency protection to investment property borrowers where the purchase money is financed by seller carry-back. I think you may have stated that 580(b) only applies to owner-occupied residences of 4 or less units. That's only half of 580(b). Do you agree?

[5284CA]

CCP 580b: This is the purchase money rule. Under this rule, a lender can not pursue a debtor after foreclosure for any deficiency balance as long as the qualifications under 580b are met. That means that if there was a judicial or non-judicial sale, and the lender did not receive their full loan balance from the sale and money is still owed, they can not enforce payment on the difference. Specifically, the statute holds as follows:

To qualify under this statute, you must meet the following three requirements:

1) Purchase Money: The loan must finance the purchase of the property. A refinance will not work
2) Occupancy: The purchaser must occupy the property entirely or in part. Investment property where the purchaser never occupied the property at least in part, will not work
3) Under 4 Dwelling: The property must be residential property with 4 or less families.

How does this play out?

If you purchased a home for $500,000 with a $400,000 first deed of trust and $100,000 second deed of trust, which was never refinanced, where there was no fraud or waste, and which you occupied, if the first forecloses and receives $300,000, then the first and second can not pursue you for any deficiency. So even though the first and second are still owed $100,000 each, they are prohibited to pursue the deficiency by law.

This seems pretty clear here that there is no way to get to a borrower if all money was for purchase regardless of how many loans there were...

I think many will benefit form this post

[doug_kayaking]

Can CCP 580b or 580d be used in Tennessee?

[KT in CA]

They are specific to California.

[macd1620]

I am in the same boat as 5284CA. I have an 80/20 first and second mortgage and foreclosure proceedings have begun in CA. According to my credit report the second lien holder has written off the debt and closed our account. However, they have either employed or sold the debt to a collector who continue to pursue a settlement.

Once the foreclosure proceedings are completed, what recourse do I have in dealing with the collection agent? Since both loans are original purchase money on my primary residence (in CA), my understanding is that I am protected under CCP 580d. However, I am unclear how to properly deal with the collection agency's attempts to collect.

[jayguy0710]

macd: collection agency's are known to attempt to collect even though they are legally barred from doing so. If you search hard enough on this forum there is an example of how to deal with this, but basically you draw up a letter to the collection agency making reference to CCP 580b and informing them that they are legally barred from pursuing a deficiency judgment. Also make note that you are sending a copy of this letter to the CA Attorney General and your local state representative (whether you do so or not).

That should get them off your back - good luck.

J

[knownick]

Until the first completes the foreclosure it's perfectly legal for them to attempt to collect from you. If they continue to do so AFTER the foreclosure has completed, then send them a letter stating clearly that the debt is non-recourse and cite the relevant sections of California law. If they continue after that then you are entitled to remedies under the FDCPA.

[mkmdesign]

Hello- I thought that I had asked the proper questions when I started the Strategic Default process (spoke to a lawyer and a CPA) but this thread has confused me (easy to do these days so forgive me). Background: 12/04 Single family owner occupied home loan with Countrywide 5/1 int only 1st 415k, 2nd 25k, 90k down, 10/06 48k HELOC to pay off 2nd and home improvements (34K), 3/07 BofA 30yr fixed 1st 417k, BofA 30 year 87k 2nd, the 2nd paid off two cars (37K) and HELOC. The information that I was given was that only the 37K could be considered "Non original debt" and could be taxed. Question(s): Is the 37k my only tax liability amount and will I get hit by the feds and CA on that amount? How does "Original debt" phrase relate to the purchase money one? Is was also instructed that my situation was non-recourse. From this thread that does not seem to be true. If it is non-recourse and considering that BofA (officially GreenTree for the 2nd but they are owned by BofA) owns both loans, will the foreclosure action be the only one that they can take? What would/could prompt a judicial track for the foreclosure? Too many questions I know but I'm on a roll.

[Ready2Run]

mkmdesign

That's a lot of information so I'll do my best. First the easy thing... Purchase Money, this is the original money used to "purchase" the home. This could be one loan or many as long as ALL the money was used to purchase the home. Once you refinance it is no longer considered purchase money. Now in California Purchase money is Non-Recourse and everything else is recourse.

Taxes are a different story all together. I'm not as knowledgeable here but I'll give it my best shot. I believe what you were told goes along the line of the Mortgage Debt Relief Act of 2007 which was extended till the end of 2012. This act only covers money used to pay for the home (and possibly some home improvements). Money used for any other reason will get tax as normal. This act is set to expire, if it does any money forgiven after the expiration will be taxable income.

Hope this helps.

[knownick]

The information that I was given was that only the 37K could be considered "Non original debt" and could be taxed. Question(s): Is the 37k my only tax liability amount and will I get hit by the feds and CA on that amount?

That's more or less accurate. The mortgage forgiveness debt relief act specifies that any secured debts that were used to purchase, refinance a purchase (up to the extent of the original note, ie no "cash out"), or substantially improve a property are covered. The portion that did not go back into the house (the 37k) is subject to cancelation of debt income.

Is was also instructed that my situation was non-recourse. From this thread that does not seem to be true.

The current language of CCP 580b does not extend to refinanced loans. So yes, both loans are technically recourse. This is only a practical concern for the second (who will become a sold out junior once the first forecloses).

If it is non-recourse and considering that BofA (officially GreenTree for the 2nd but they are owned by BofA) owns both loans, will the foreclosure action be the only one that they can take?

I'm not clear on that one. I know people have cited some case law in the past on this one, but I'm not sure of the outcome.

What would/could prompt a judicial track for the foreclosure?

Essentially nothing, don't worry about it.

[TomEason]

knownick

Thanks for your post and your opinion. I do disagree with your stated opinion about the likely outcome of a contested case involving a "non cash out rate and term" refi loan.

First of all, it would make no financial sense for a borrower to contest the recourse status of a refi 2nd loan in our state.

The debtor would end up spending much more $$ than could be saved or awarded pursuant to the provisions of the CA statute and any settled case law. He/she would be better off simply paying any tax liability, as it would be much less expensive than a lawsuit.

As for the question around the "one action rule" contained in Cal CCP Section 726, there is no disadvantage to your having both loans with BOA (including GT).

Good luck.

[knownick]

Thanks for your post and your opinion. I do disagree with your stated opinion about the likely outcome of a contested case involving a "non cash out rate and term" refi loan.

It was not my intent to offer any opinion on the likely outcome of anything, only to clarify the law.

First of all, it would make no financial sense for a borrower to contest the recourse status of a refi 2nd loan in our state.

The debtor would end up spending much more $$ than could be saved or awarded pursuant to the provisions of the CA statute and any settled case law. He/she would be better off simply paying any tax liability, as it would be much less expensive than a lawsuit.
[/quote]
Agreed completely.

[TomEason]

Hi knownick

Thanks for your post. I apologize and stand corrected; you didn't offer an opinion in your previous post.